Are We Nearing a Tech Bubble Burst?

Is anyone else concerned we’re very close to another tech bubble burst? It’s normal that history repeats itself, but it usually happens with generations who don’t remember the first time around.

In Chicago, we don’t have to look far to begin this conversation. A little more than a year ago Groupon was offered $6 billion from Google (an offer they turned down in order to go public, which they did less than a year later). At the time, I predicted they would falter and never see that kind of money again.

I didn’t make this prediction because I have some crystal ball that tells me what’s going to happen and gives me winning lottery numbers. I made it because I was reminded of what happened during the dot com bubble.

This is a lot of money for companies that don’t make money (excluding Facebook, who has figured out the profit game). I’m reminded of 1999, when venture capitalists were paying big money for great ideas and lots of eyeballs, but companies without business plans or a way to make money.

During an event I attended last week, Carol Roth reminded the audience a company is worth what just one person will pay for it. Hence, Instagram was worth $1 billion to Facebook because they clearly have something the giant social network does not.

And Chris Dixon says no good VC firms invest in companies with the idea they’re going to flip them. He says this is a bad strategy and they’re much better off investing in companies that have a good chance to build a very profitable business.

But is this enough? Did we learn our lesson from just 12 short years ago? Or are we quickly careening toward another mistake that could have been prevented by studying history, setting aside our egos, and forgetting about greed?

I don't think we're lined up for another tech bubble like the prior one. In the last bubble we were pouring money into businesses via their publicly traded stock that weren't even profitable with the expectation that they would be. If anything the companies that are far ahead and paying ridiculous amounts of money to get talent, strategic positions and suppress competition actually have viable business models and are churning out profits. Right now it is private investors that are taking the risk and they are winning some and losing others but I don't think that has implications on the average person or business.

What I am wondering about is if any of the big players are going to over-reach and implode under the weight of all those acquisitions. Google lucked out on Groupon, or maybe they didn't, maybe they could have made it worth more than $6 billion but I doubt it. ;)

Hey Gini, what do you want for SpinSucks? I value it at $10billion. Top that Zuckerberg!

Maybe all the dudes invloved in the last burst are gone and the new dudes haven't learned anything from them. Hopefully the financial sector can impart some knowledge and show us that if you shuffle money around and around in circles you are not really creating value.

I am sure there is some rediculous value statement that justifies the $10billion I am willing to pay for SpinSucks.....er, sorry slipped out of reality there for a sec, value statement that Zuckerberg paid for Instagram, or wait, reality? What's that? Oh yeah, 500mil subscribers with no money to spend.

I know this is a really, really simplistic way to look at it, but I think this round is gonna burst too. Jut looking around, people continue to pay obscene amounts of money for companies, products and platforms that don't make any. And half the startup mentality is to just make something catchy to get buzz to get investment to put more money into it to get more buzz to get bigger investments to make a bigger product to get snapped up by a giant. It works for some (hello, Instagram), but I can't help but wonder where all that other money is going for all the ones that fold. I would assume that pretty soon most folks will figure out that playing those odds, at least at such a high stake, is not worth it.

I'm probably alone in this, but I think it's not going to be so much a tech bubble burst as it is a social media tech bubble burst. But it will be much smaller than the dotcom bubble deflation.

Basically, social networks are worth money based on the presence of people and engagement. If companies can't find a way to effectively monetize the sites (without annoying the users) AND if companies continue to flail about with social media campaigns that don't measure or measure the wrong things, or have no long-term objectives then there will be a problem. Sites need to make money to make sense as publicly traded companies. The ancillary businesses that have sprung up around social media, including practice groups at PR firms, web advertising, social media "experts"/consultants, community managers and a whole host of others need to be able to point to real, concrete business objectives being met through the use of social if it is expected that the money will continue to flow.

However, I see this potential "bubble" as an evolutionary necessity. It will weed out the under-performers and pave the path to sites that are able to monetize and work well for all of their constituencies.

I have to say yes, we are. The Instagram acquisition is clearly out of hand, and until Facebook monetizes it and proves us different with $1 billion plus interest in ad profits on Instagram, I won't agree with any pundits who think the purchase was worthwhile.

Right now the climate is mild compared to .com era. Back then just having .com in the company name seem to qualify you to go public. It was too easy and everyone was playing the game, then then door slammed shut. While I think there maybe some overvaluation, the froth reached back in 2000 was off the charts. It was la la land. Groupon would have been $150 stock by now in 1999-2000, even though at $10.19 GRPN looks way too high.

When the only thing that matters is making quick, big and easy money probably memory fades away quickly. Anyway sorry for Carol Roth but a company is worth depending on how much money it has in the bank, the rest is like playing dice at Vegas. You can sell a valuable idea but if it doesn't transform into something real then you're throwing money in the bin.

But it will be very interesting to see how much people will pay for FB quotes during the IPO and how much they will be valued after one year, my prediction is that a lot of this wise investors will cry. If the world is going to exist even after December 2012. :)

If I had a lot of money to invest I would follow Warren Buffet's advices as he's not one of those who don't do but teach how to. He did it for real so probably knows a thing or two. Does he invest in dotcoms?

Having also been there in the late 90s, one thing I'll say for this bubble is that it's made of slightly thicker soap. Some of those dot.com businesses in the 90s were seriously flimsy and you didn't even bother asking to see the business plan because you just knew what the young Swedish Harvard grad in the black mock turtleneck was going to tell you, or worse, doodle on a cocktail napkin. This time, the business plans are there but I think many are based on shaky foundations. As in the dot.com boom I think tech startups in this boom are pinning too high expectations on advertising revenue without having a tangible way of forecasting what a genuine commercial outcome could be. Advertising and social media remains tricky. Consumers are starting to accept that it's necessary to support free products and services, but put one foot wrong and trust and credibility go right out the window (Groupon). Also some social media trends are fun at first, but then many dabblers get bored and realise they need to go back to their day jobs. So Bubble 2 is interesting and a major improvement on 1, but I do think we should brace ourselves for another burst.

I think what's going on is a reflection of the secular bear market that we're in (and will be through at least 2017 if history is a guide). I call it the "Hollywood Effect".

The market is ruled by fear, not greed right now. Everything looks risky. The market makers are looking for the one sure "blockbuster" - the "Transformers XX" that is like money in the bank. And when they think they have it, the flight of money into it is insane.

That may well continue for a long time as long as it's only a select few companies that are experiencing it. Remember that during the last 'net bubble nearly anyone could score, even toys.com and pets.com. It's far more selective right now, which is what the "Hollywood Effect" is all about.

Yeah, this is something I've thought about, too. For what it's worth, I emailed a guy whose economics blog I read and asked his thoughts on it, because I don't have much chops in the ways of economics. He said that it looks like there is a bubble, especially given that companies like Instagram, as Gini said, don't even have a revenue model and are getting bought out for $1 billion.

So, people who know more than I do say 'yes.' How and when it pops? That's tough to tell and he couldn't really predict it. We shall see.

After reading some articles about the valuation of Pinterest I got really worried. Why do we even need to look back at the last tech bubble? How about the real estate bubble that basically JUST happened? Yes, the industry is obviously different, but the lessons are the same - unfortunately people tend to be very short sighted and excitable.

It maybe naive but I don't think another bubble burst is possible now. The first go round there was an infatuation with the internet, it was new, endless and full of unending possibilities that lead everyone to believe fortune was just a click away. However online business has become more standardized and for better or worse internet business has been heavily regulated. I think there is life after Facebook and it is a matter of time before its shares rot away to myspace value but I don't think that because a select few are obviously over valued it signals the coming of some grand financial collapse of the industry. Only time will tell of course.

I think it's a legitimate concern considering how many of these buzz-worthy companies don't actually make any money. Like a previous poster said, it's like the real estate market. In my area (SW Florida) the bubble was HUGE. I feel very much that an Instagram valuation of $1bil is a similar type of crazy.

You make a good point that the last Internet bubble burst a short time ago, yet in spite of that, tech companies have flourished again. Many tech companies have either risen from the ashes or been started new since then.

During that time, the worldwide economy has been changed drastically, with very few areas experiencing significant growth other than tech. Howie has a good point, Main Street wants a winner and with 800 billion users, Facebook certainly appears to be a winner.

Twitter also has had huge success, but like Facebook, has struggled with transforming growth into monetization.

What can make tech companies valuable beyond their ability to produce income is their assets. Tech companies that have an active user base and/or a strong patent portfolio may be valued well beyond their their income statement. Whether investments in these companies is keen foresight or blind greed remains to be seen.

Well, it's not a real $1 billion now is it? It's $300 million plus stock swap; were Facebook to eventually pull a Groupon, the numbers would look a little different. See also: AOL/TimeWarner or many of Google's acquisitions. Net worth was lost on paper, in the market. It hurts, but IDK.. it's not like those stacks of hundreds just walked out from under the mattress.

And I think that's the problem when not making 'stuff': virtual money. So much of the dots bombed b/c it was all virtual, nothing substantive. Read yesterday about how much market cap Groupon is losing daily and at this rate, they'd actually be gone in a month or so. Not sure if it will happen or not, but I hope it'll be a cautionary tale and cooler head prevail. But not until I can sell out for my millions. FWIW.

The Facebook investors and Facebook owners are using a Pump and Dump business model. Ride the hype then sell out. That is what Russian Mafia, Chinese Mafia and Jewish Mafia (Goldman) do. Chris Dixon is right. Normally the owners make their money during the IPO including the VCs. But in this case the investors bought inflated parts of Facebook looking to flip it making Zuckie a billionaire.

This is the prime driver of the bubble. Everything is being compared to Facebook and thus inflated. And Zuckerberg and Sanberg (I know you like her she is evil to me) have guns pointed at their heads by the mafias to make sure they go IPO around $100bil and make it to $125b at least before the collapse. And with Social Media short life cycle the race is on. So they are pumping and paying for media coverage, They give Spin and Fuzzy math and if you read the S-1 filing I would never invest in such a company based on what they put in there.

But main street wants this too. They crave a rising market that is irrational so they can feel rich again even if it gets taken away again in the end. Humans suck.

@jenzings You're exactly right - it used to be about eyeballs and now it's about followers and fans and viewers. Ancillary businesses are popping up, just like they did during the dot com era. You used to pay $100K for a website. Now you can get one for $1K. Creating a business around a trend like this is a very bad idea.

@Craig McBreen I dont think it's the same thing as 12 years ago, but I do think we're seeing a lot of the same mistakes as then. I mean, paying $1B for a company that doesn't make money? I wish I could get in on that deal.

@JMattHicks@Bzarbock@ladylaff great comment Jeremy. Coming from the finance side of things the 'bubble' is valuations, stock pricing, and vc investment/dealmaking' these will burst. It happened in Housing recently. Commodities are boom and bust. When it busts some people get mega rich most lose money. and they lick their wounds and wait for the next big thing.

So in 2002 it is possible Livefyre never would of found any funding and today they can. And if you go public before the bubble bursting have access to raise capital in ways you can't today.

But if you view the bubble meaning tech itself no. It will ebb and flow in how big a frenzy it is. remember Google was post bubble and actually went public in a low period. The biz trade pubs would use metrics like number of IPOs and we had a period when that market was dead a few years back. But housing was cranking!

@wabbitoid I don't think it is selective right now. Based on conversations I've been having with multiple friends in Silicon Valley, it's happening again. "We'll invest in you because we like your idea." That's VERY scary business.

@Bzarbock I think the infatuation is back. I don't think it will be as devastating at the dot com bubble, but this is what happened in 1999 and 2000: People paid crazy amounts of money for companies that had no business plans and weren't making any money. And it's happening again.

@wonderoftech I actually think Facebook is one of the few that will make it after they go public. They know how to make money. But Groupon isn't going to last much longer, Instagram was just bought for $1B, and Twitter can't figure out how to monetize themselves. I think we're teetering on a very close edge.

@3HatsComm In 2001, there were 427 companies that went public and nearly half of them doubled in price the day they went public. In 2002, less than 100 companies went public and none of them doubled in price. I also found FB is valued at $96B (as of Friday, when I wrote this blog post). The stuff that concerns me is the greed around pumping up a company in order for its founders to become gazillionnaires, without thinking about what it does for the greater good. I rarely agree with @HowieSPM , but I do on this.

@3HatsComm Sooner or later, people will have to make stuff in this nation, yes. In the last 20 years our accumulated trade deficit is about $7.8 trillion. We have an economy based on printing US Dollars and sending them overseas for gizmos and oil. It will not last forever, and may be in its last throes right now.

This "virtual money" is just part of a bigger problem that is in the process of correcting itself, IMHO.

@JMattHicks@Bzarbock@ladylaff The dotcom and housing had very similar influences. Dot.com had day trading. people quit their jobs to trade stocks all day and the market rose for 5 years so no one failed. And then companies were considered winners based on how fast they burned cash. Once the market popped housing took off, And those day traders and average person jumped into home became realtors etc. At the peak there was 1.1 million homes for sale and 1 million registered real estate agents in California. I mean how can you live selling 1 house a year. I remember zero down no payments no credit check tv ads galore. People were flipping homes after owning for 3 months.

Now everyone is a social media guru. The number of people trying to be personal brands, agencies etc is propelling the use of networks beyond their natural rates. Which has VCs in a tizzy. The fact is we spend only 12 mins a day on social networks and almost 5 hours with the TV on. Yet facebook is about to be valued more than most media companies?

When you are older and you have seen a bunch of boom-busts it really comes down to when Joe and Jane Blow on the corner jump into the frenzy. Wall Street loves this stuff they can flip stocks and investments easy. They just hope when the market freezes they get out before Joe and Jane Blow do. And often they do.

I look at long term big picture. When housing averaged 4% growth a year from 1945 til 2003 then that ramped up to sometimes 25% a year in some markets with no reason driving that like a surge in population or inflation it was off kilter. Same with stocks. 7.9% growth since 1929 then in dot come we saw NASDAQ have 40% then 60% growth in consecutive years. In 2000 the down was 14000. Last time NASDAQ was this high was 1999. In fact it is still down 33% from its peak 12 years later.

@JMattHicks@wabbitoid I shared a post a while back - long list of all the "Americana" stuff we buy and none of it made it the U.S. Levis? No. American girls dolls? Not so much. The biggest 'American' beer company is now Sam Adams; but then again, so what if InBev owns Budweiser - if they're still hiring, paying people in the US? Or the KIAs made here in Georgia? And yes, I'd love some of the monopoly money these companies have to be sitting in my bank account. Back to valuations, it's got to be tied to products/services people want, pay for and will continue to do so, to companies that will make profits.